Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, June 27, 2011

Greece: Creating prosperity through spending, Right?

A constant theme of Paul Krugman's columns and blog posts is the idea that prosperity is created through spending, lots and lots of spending. When the economy started tanking seriously four years ago, Krugman and politicians of both parties immediately started to push more spending as a way to end the downturn.

Obama himself after taking office declared that the USA would spend its way out of this recession/depression and the only condemnation that Krugman could muster of this strategy was that the administration wasn't borrowing and spending enough money. Since the government could create its own "money" at a whim, the only limit on spending our way back to boom conditions was a political will to increase the government's debt obligations to future taxpayers.

Then came the Greek crisis. Consistent with his Keynesian viewpoint, Krugman said that the "solution" for Greece either would be huge European Union bailouts or a return of Greece to its own currency, abandoning the Euro. Anyone who might argue that governments were cannibalizing future resources and production in order to maintain current spending was condemned as a promoter of "austerity," which in Wonderland is a Truly Evil Person.

Ever since joining the EU, the Greeks have acted as though Paul Krugman were their Guiding Light. As this article demonstrates, Greece's government, courtesy of EU taxpayers, has created boondoggle after boondoggle complete with a bloated public payroll:

Even on a stiflingly hot summer's day, the Athens underground is a pleasure. It is air-conditioned, with plasma screens to entertain passengers relaxing in cool, cavernous departure halls - and the trains even run on time.

There is another bonus for users of this state-of-the-art rapid transport system: it is, in effect, free for the five million people of the Greek capital.

With no barriers to prevent free entry or exit to this impressive tube network, the good citizens of Athens are instead asked to 'validate' their tickets at honesty machines before boarding. Few bother.

This is not surprising: fiddling on a Herculean scale — from the owner of the smallest shop to the most powerful figures in business and politics — has become as much a part of Greek life as ouzo and olives.

Indeed, as well as not paying for their metro tickets, the people of Greece barely paid a penny of the underground’s £1.5 billion cost — a ‘sweetener’ from Brussels (and, therefore, the UK taxpayer) to help the country put on an impressive 2004 Olympics free of the city’s notorious traffic jams.

The transport perks are not confined to the customers. Incredibly, the average salary on Greece’s railways is £60,000, which includes cleaners and track workers - treble the earnings of the average private sector employee here.

The overground rail network is as big a racket as the EU-funded underground. While its annual income is only £80 million from ticket sales, the wage bill is more than £500m a year — prompting one Greek politician to famously remark that it would be cheaper to put all the commuters into private taxis.

Not that any of this would matter in Keynesian thinking. Indeed, the Greek Underground would be considered the Ultimate Exercise in Creating Prosperity because it spends lots of money, and anyone who might protest that this is a huge waste of resources is an Enemy of the People.

The picture painted of Greece in the above article is a picture you won't read on Krugman's page or in the NY Times, as the omission of Greek wastefulness really highlights where Keynesians and Austrians part company (not that they ever walked together, anyway).

In the Keynesian/Krugman view, spending is separate from production and, to be honest, spending is the key to producing wealth. If you spend, they will produce.

I note this because I can anticipate the objection: Demand drives production, and even Austrians, with their emphasis upon the valuation of the factors of production being imputed by consumers placing value on the "final product," would admit to that. However, when Keynesians and Austrians speak of "demand," they are speaking in two different languages.

Keynesians couch demand in simple spending; put money into the hands of people, let them spend, and the economy magically will appear. (Chartalists go even further, claiming that because governments can claim a legal monopoly over money creation, that the amount of "demand" governments can create is infinite, since government is not "revenue constrained.")

Austrians, on the other hand, note that one cannot consume when one is not producing, and that Say's Law -- yes, that "tyrannical" Say's Law that Keynesians hate so much -- has something to tell us. The only way out of this world-wide depression is for governments to stop this massive borrowing and spending and permit the malinvestments -- and they are legion -- to liquidate and for the lines of production that are sustainable to be permitted to develop.

The current tragedy in Greece is the product of reckless spending and malinvestment. Unfortunately, neither the Greeks nor the economics faculty at Princeton are willing to face the facts.

"Keynesians couch demand in simple spending; put money into the hands of people, let them spend, and the economy magically will appear."

Please see above.

"Chartalists go even further, claiming that because governments can claim a legal monopoly over money creation, that the amount of "demand" governments can create is infinite, since government is not "revenue constrained."

False. Or is it liar? I sometimes can't tell the difference between ignorance and out right lies on this blog anymore. As anyone who has bothered to take the time to understand how the monetary system functions in the real world and not in some utopian economy that does not exist, then you know the constrain to deficits (not spending, but deficits. You do realize there are two ways to run a deficit, right?) is inflation, not infinity. Get a clue Mr. Anderson. Get a clue.

"Austrians, on the other hand, note that one cannot consume when one is not producing, and that Say's Law"

Of course, there is exactly zero historical or empirical evidence this supply side theory of nonsense exists. But carry on with the neo liberal myths. Ignorance is bliss.

"The current tragedy in Greece is the product of reckless spending and malinvestment"

And fraud.

"Unfortunately, neither the Greeks nor the economics faculty at Princeton are willing to face the facts."

You're repeated attacks on Princeton and other elite institution is childish. I get it, you are part of the movement to dumb down America. Ignorance is now put on a pedestal. You're supporters on this blog are perfect examples.

Dr. Andersen, thanks very much for your valued input and critique of "elite" members of the Krugman Keynesian Klan.

I'm curious (and I'm being very serious here), as someone who exists in academia and must remain "in the closet" concerning his libertarian tendencies (to avoid the possibility of being rejected for tenure), do you know colleagues who are in a similar situation? It would be great if you could post an article concerning this bit of irony (considering that progressives are supposedly in favor of other members of society "in the closet" of having the freedom to emerge without ridicule)

Ah AP Lerner, the waste of money government employee who has a personal stake in defending bureaucratic boondoggling.

Please read this. Again. Then again. Thank you.

and

Please see above.

You should take your own advice. When Keynes advocated for government deficits, he specifically went out of his way to show everyone he didn't care what the money is spent on, as long as the government just "spends."

Inflation is what Anderson just said you illiterate social parasite. If governments can inflate any quantity of money at virtually no cost, just by clicking a few computer keys, then deficits are not limited, because inflation is not limited. When Anderson says infinity, he means there is no natural check on how much money can be created as compared to a free market standard.

Of course, there is exactly zero historical or empirical evidence this supply side theory of nonsense exists. But carry on with the neo liberal myths. Ignorance is bliss.

Of course, there is exactly zero historical or empirical evidence this demand side theory of nonsense exists. But carry on with the statist myths. Ignorance is bliss.

And fraud.

Redundant.

You're repeated attacks on Princeton and other elite institution is childish.

First of all, the word is YOUR you illiterate yahoo. Secondly, your kow-towing to "elite institutions" only shows your own childishness, because it shows your inability to think for yourself.

I get it, you are part of the movement to dumb down America.

No, that's the job of you government employees, who brainwash our children to not question their masters in government schools.

Ignorance is now put on a pedestal. You're supporters on this blog are perfect examples.

Do you have any idea how uneducated and hypocritical it is to keep writing "you're" instead of "your"?

Instead of trying to appear educated, you should actually educate yourself.

"Do you have any idea how uneducated and hypocritical it is to keep writing "you're" instead of "your"?"

Nice. Way to attack my spell checker, and not the content. Kudos. Thanks for proving my point.

"Please explain the 'current tragedy in Greece' and how what Professor Anderson said is fraudulent"

I did not say what he said was fraudulant. I said fraud is part of the problem. The issues in Greece (in addition to the massive fraud) is the currency. Greece is essentially on the gold standard. The entire Euro project is a form of the gold standard. Mr. Anderson, as a supporter of the gold standard, can't admit this, because if he does, then he also has to admit that the gold standard is flawed. And that would go against his ideology. And we all know, his ideology is second to none. Instead, he blames a made up version of Keynes that supports his phoney belief system. It's intellecutal dishonesty at its finest.

(FYI - I didn't even bother to run this across the spell checker, so please feel free to waste more time correcting if that's all you have to offer.)

The Germans were always too rich IMO anyway. They have a duty to make sure the Greeks live high on the hog. After all, they should *never* be let off the hook for what they did last century. Let those warmongering fascists eat cake.

If "inflation" is a contraint on deficits, how do you satisfy the obligations and promises made during the current and present deficit period when inflation unexpectedly rears its ugly head later on? You have real problem because your system does not account for economic calculation. In fact, MMTers and Keynesians don't even know what we mean by EC. It's like arguing with your poodle.

How is that the MMTers cannot once answer any of our numerous concerns about their silly "system"? Once you get a handle on all of their BS doubletalk, you realize that the MMTers have no understanding of economics whatsoever. I think they really know this. Otherwise, they wouldn't avoid discussing the problems with their "system" like the plague as we point them out daily.

Don’t forget that APL is a fan of Abba Ptachya Lerner.

My approach to the world is often labeled as Functional Finance, or Modern Monetary Theory, and is influenced by the work of Abba Ptachya Lerner:

http://www.blogger.com/profile/10131895292917933329

David Colander, a co-author of a 1980 book with Lerner wrote:

Initially he toyed with various administrative wage and price control policies, but he found those lacking and soon gave them up. He replaced them, first, with a tax based incomes policy and ultimately, a market based[!!!] incomes policy in which property rights in prices are set and individuals have to buy the right to change prices from others who change their price in the opposite direction. It was this idea that formed the basis of our market [!!!!!!] anti inflation (MAP) book. (Lerner and Colander 1980) Under MAP, rights in value added prices would be tradable so that any firm wanting to change its nominal price would have to make a trade with another firm that wanted to change its nominal price in the opposite direction. Thus, by law, the average price level would be constant but relative prices would be free to change [@page 12]

http://tinyurl.com/4rfk3jk

Lerner's magnum opus is called "The Economics of CONTROL" which say it all:

1. People create stuff and learn skills to trade with people who have different skills than they do. Money is a medium of exchange and you want it to have the same value over time (as best it can) so that the value of different things can be reasonably compared over time. MMT and funny money fatally impair this process. MMTers deny that this self evident process which is a fundamental aspect of human life even exists. This is why APL says that catallactics does not matter after 1971.

2. APL calling the Euro "the gold standard" is preposterous. The major purpose of using gold and silver as money is to CONSTRAIN the creation of loans that are not funded by real savings. Real savings means the foregoing of immediate consumption. MMT-style government debt instruments are not real "savings" and MMTers don't even understand that. It's like debating your poodle.

AP said “The entire Euro project is a form of the gold standard.”Well yes and no. I understand your point and to the extent Greece cannot debase its debts because it has no sovereign fiat currency, and is locked in that regard, you are absolutely correct. However to analogize it to a “gold” standard is incorrect since it the Euro can be created at will.

AP said “then he also has to admit that the gold standard is flawed.”Incorrect. Greece (or any other sick country) would not have the problem if spending was properly restrained.

There is something wrong with people who think it is OK for governments to promise average people virtually unlimited economic payoffs when that is impossible. It is even worse when the perpetrators whine that they are "constrained" from "satisfying" the promises because the particular situation precludes the use of diluted funny money to reduce the real value of the promised goodies. And, for whatever reason, the rabble is too dumb to understand the nature of the game and that have been played.

Actually, I am tenured and will be going up for full professor in 2012 or 2013 (depending upon whether or not I want to put together the promotion folder this coming year, or wait and put off that unpleasant task for another year). People here are pretty much aware of what I am doing, and this past year, I received a Faculty Achievement Award for publications:

http://www.frostburg.edu/news/searchnewsdt.cfm?id_number=6401

To add to the irony, for the past three years, I chaired the university's promotion and tenure subcommittee and have been told by the provost that they want me back within a year or so.

In other words, despite the typical atmosphere at the university level (and ours is pretty typical), I have managed to do what I like to do, academically speaking.

Nice. Way to attack my spell checker, and not the content. Kudos. Thanks for proving my point.

Hahahaha, I refuted your erroneous grammar AND your erroneous content. Not only are blaming a computer for your own spelling mistakes, which makes you a selective speller, but you're lying when you claimed I am attacking your grammar "instead of" content, which clearly implies I did not address the content of your ridiculous post, even though I did.

"Demand drives production, and even Austrians, with their emphasis upon the valuation of the factors of production being imputed by consumers placing value on the "final product," would admit to that"

Bravo... Reality permeates the fog of Austrian obscurantism.

I will remember this the next time your ignorant "fans" here try and deny this.

Austrians, on the other hand, note that one cannot consume when one is not producing,

Well, duh.. Yes, any commodity consumed must have been produced, at home or abroad. This trivial fact does not refute Keynesian economics.

More seriously, numerous countries regularly consume more than they produced domestically all the time: it's called a trade deficit/current account deficit.

It is in fact one of the basic marvels of modern capitalism: a nation can attract the money needed to pay for excess imports when foreigners buy that country’s financial assets or real assets, and they have a capital account surplus.

America in the 19th century had trade deficits all the time: it was in fact consuming more than it produced at home.

So what are your points exactly AP?The fact that Greeks evade taxes is no news as so did americans in the 1950s (no one paid the tax rates in the 90-95% range).

In order to provide for the welfare state (as well as society in general with services that do not self sustain) taxes have to come from someplace and that place is the producers of the society (unless you progs have invented a money tree that you are hiding from the rest of us).

Are you denying that Thatcher was right in saying "the problem with socialism is that sooner or later you run out of other people's money"?

The PIIGs are trapped in the jail called the Eurozone. Their problems are proof (if you need it) of the uselessness of mainstream neclassical economics: you can't run a monetary union without a federal fiscal policy.

"In order to provide for the welfare state (as well as society in general with services that do not self sustain) taxes have to come from someplace"

It is real resources that is the issue: if those real resources are available, and there normally are in industrialized nations, then the distribution of them is a political matter.

You can have a much more even distribution as in Sweden or Norway, where common sense has rejected joining the Eurozone.

The result: they still have monetary independence and there is no crisis, even though they had Keynesian stimulus in 2009 that got them out of recession.

LK said: "then the distribution of them (resources) is a political matter"

You are correct. In every form of government other than a constitutional republic/democracy, either whatever thug in charge steals and redistributes or in an unchecked democracy the masses vote themselves goodies from those that have the resources.

Two questions LK:1. Are you ok with that?2. You never answered my old question. Do you believe “demand’ is the engine of a free market economy? Does it drive the bus?

1. "Demand" is really an absurd concept. Each party to a transaction is "demanding" something and "supplying" something. You either have something to trade or you don't. The other guy either has something to trade or he doesn't. Funny money just upsets the calculation process. But we already knew that.

2. The distribution of resources as a political matter is nothing but theft and the road to serfdom.

I will remember this the next time your ignorant "fans" here try and deny this.

Anderson was only restating the fallacious Keynesian position that government "spending", on fake dog poop, or solar powered flashlights, generates real wealth.

Only an anti-economics simpleton would claim that spending qua spending drives the economy forward.

Well, duh.. Yes, any commodity consumed must have been produced, at home or abroad. This trivial fact does not refute Keynesian economics.

The fact that production requires saving and investment spending, not just any old "spending," does refute Keynesianism.

More seriously, numerous countries regularly consume more than they produced domestically all the time: it's called a trade deficit/current account deficit.

Which requires other countries to produce more than they consume. The economy as a whole cannot all be in a trade deficit.

It is in fact one of the basic marvels of modern capitalism: a nation can attract the money needed to pay for excess imports when foreigners buy that country’s financial assets or real assets, and they have a capital account surplus.

America in the 19th century had trade deficits all the time: it was in fact consuming more than it produced at home.

That's because the incoming capital surplus that generated the trade deficit was the result of incoming money going to investments, instead of consumption.

The PIIGs are trapped in the jail called the Eurozone. Their problems are proof (if you need it) of the uselessness of mainstream neclassical economics: you can't run a monetary union without a federal fiscal policy.

If the PIIGS are "trapped" because they can't print their own money, then by that same logic, all Americans who are not at the Fed are "trapped" for the same exact reason.

It is real resources that is the issue: if those real resources are available, and there normally are in industrialized nations, then the distribution of them is a political matter.

What of the present resources going to waste as unemployed? You have no answer. None at all. I've looked at the spending by the government and deficits during WWII. Much, much higher than now! Appears to be Keynesian economics in action that got us out of the depression.

A lot of you folks misunderstand Keynes. Keynes only believed that in a weak economy like now with a lack of demand in the private sector, the government can create some demand by funding things like roads and bridges. Keynesians, like Krugman, DON'T BELIEVE in running deficits or reckless spending at other times.

Not quite. The government could obviously end unemployment by drafting the entire nation. The question is whether or not this increases the nation's standard of living.

Did people live better during the Massive War Spending Years?

The answer is clearly no. The government created the illusion of prosperity by spending massive amounts on war goods. This made it seem as if output was increasing and jobs were being created at a rapid pace.

What of the present resources going to waste as unemployed? You have no answer. None at all.

Since unemployment is caused by the impoverishment induced by Keynesian money dilution and drunken sailor government spending, it's all your fault in the first place. The key is to stop the spending and stop the money dilution. Continued deficits, spending and super low interest rates are killing the economy. Our hearts go out to the unemployed and we can just hope that they can survive until we rid the world of the evils of Keynesianism. But with these Keynesian scumbags so entrenched, that's probably unlikely in the short run.

Jim, So, the transformation of the U.S. economy was by magic then? Here's a quiz question for you..Adjusted for inflation, the debt from WWII was about twice as high as now. How did we have a great post WWII economy and pay that debt back at the same time?

You guys have no answer for the lost productivity of the present unemployed. You just say too bad. Pathetic. Gov spending now recovers some of that lost productivity. A simple example is keeping teachers employed teaching our children. That money is an investment in our future and not a waste. Or, don't you guys believe in education?

First off the debt was owed to citizens in the U.S as people willingly lent money to the U.S government because we had the industrial capacity and the savings necessary to finance the debt. We do not currently have those fundamentals in place today. That is the difference. There is a big difference between owing debt to foreigners and owing it to your own citizens.

The “lost productivity” of the unemployed is simply a result from the misallocation of labor that resulted in the Fed induced housing bubble caused by artificially low interest rates. They now need to find lines of work in sustainable lines of production that are consistent with real consumer preferences.

Entrepreneurs will engage in economic calculation and using the pricing system to guide resources, labor and capital to their most productive ends. But of course, the re-pricing process, and the subsequent calculation that needs to take place in order to put these unemployed workers to work productively, can’t happen if the Fed keep rates super low and the U.S government keeps on spending.

That’s why we Austrians tend to be opposed to such fiscal and monetary stimuli. They really are the cause of our problems and prevent a roadblock to a sustainable recovery. Keynesians mistakengly see them as the cure. They are not.

Government cannot invest. It only spends. When you are not subject to market forces, have no profit and loss motive, and obtain your revenues through coercion rather through voluntary means, it is not an investment. It’s just government spending. Plain and simple.

"Government cannot invest. It only spends." Nice slogan. Truly ignorant. Education was a simple example. How about the national highway system? Has it not made transportation far more economical? Didn't it help enlarge the automobile market? And, how about the transistor, computer and the Internet? The government initiated research in all of them. The benefits to our economy were massive.

Federal Spending fell 58% from 1945 to 1949. Perhaps that explains the post war miracle. Likewise, many New Deal regulations and taxes were done away with when the war ended (heard of the 1947 Taft-Hartley Labor Act or the Tax Cuts in 1945 and 1948). This helped clear away alot of the Regime Uncertainty and wage controls of the New Deal, allowing for real recovery.

Have you ever heard of the Broken Window Fallacy?

Basically, that money spent on education could be spent elsewhere, perhaps better. Likewise, there is no evidence that higher education spending leads to better educational outcomes. In fact, the opposite appears to be true.

What good is more spending if it simply gets funneled to generous pensions demanded by Teachers Unions?

Like most statists, you seem to think that anyone who rejects unsustainable and wasteful education spending "doesn't believe in education".

Again, everything you mentioned is still spending not investment. If you obtain your revenues through coercion and have no incentive to satisfy consumer demand at a low cost, you are not “investing”. It is simply spending other people’s money.

Only entrepreneurs in the private sector can invest, you know, folks who actually stay in business by obtaining revenue voluntarily by providing goods and services that people value.

Collectively, the U.S has spent trillions on education and created a huge new department yet kids are not any better educated than they were prior the U.S government creating a new department and spending the trillions. Nearly 25% of all kids don’t even graduate high school. Man, what an “investment.”

But honestly, where did government get all the stuff necessary to finance those “investments.” They diverted them out of the private sector away from invidiuals who could have put those resources to work productively.

Those “investments” would have never been made if it were not for a productive wealth producing private sector. It all starts with wealth creators in the private sector.

You have to factor in all the government projects, and “investments” that never pan out, and that turn out to be a complete waste of time not to mention a waste of scarce resources.

See in the private sector, bad ideas get weeded out by the profit and loss competitive nature of the market place. In government, they continue in perpetuity. Or even worse, bad ideas get protected by government. Like ethanol.

Internet and computers, along with smart phones and flat screen TV’s were all developed, improved, and made abundant by profit seeking entrepreneurs.

Bob, don’t expect these statists to learn about EC, much less apply the concept to the discussion. I wouldnt hold my breath

zackA89, People lent money to the government because they trusted the war was a just cause and they trusted the government needed the money to win the war. By the way, we did win the war. Something that seems impossible if the government was truly as ineffective as you people state. No profit motive involved! Must boggle your mind.

You can argue that gov spending will need to be paid back in the future, but there is no argument for it harming the economy now.

Do you really want to argue that Volcker didn't get inflation under control? It certainly didn't happen on its own. Pathetic.

Saving and investment involve foregoing immediate consumption so that resources are preserved or invested for the future.

The government spends now to buy votes now and sells "securities" based upon its ability to seize resources from taxpayers later or (if you are an MMT nut) its ability to dilute the funny money supply or both.

All that money dilution and government spending can accomplish is the distortion of economic calculation. Keynesians can remain Keynesians by meticulously avoiding understanding these self-evident concepts due to stupidity, dishonestly or a combination of both.

Or maybe we got a little lucky considering Hitler was stupid enough to invade Russia during the winter. It also helps your cause if you drop nukes on people killing millions in the process. But hey, I don’t want to debate history.

No to win a war, you don’t need a profit and loss motive. I don’t really understand why you even said that. With a war you really aren’t trying to satisfy any consumer demands or raise standards of living, in fact war is the act of doing the opposite of that. You kill people, sure as heck do need a profit and loss motive to do that.

Government spending is bad economics. Look at the link bob sent you regarding the brilliant Catalan piece. Idle resources or not, government spending does harm now because it impairs economic calculation. It diverts resources like labor and capital away from profitable lines of production into the government to ultimately squander on vote buying ventures in their districts that will in all likelihood be a complete waste of resources or be somehow funneled back into their campaigns.

Volker hiked interest rates up over night to painfully high levels in order to end a Keynesian stagflationary nightmare in the late 1970’s.

Not sure what is so pathetic, cause for me, Keynesian economics and aggregate demand management is what is truly “pathetic.”

You are completely right about our lack of focus on education. Pure consumer demand problem. They don't graduate because they don't care. It isn't the system or the spending. It's inefficient because the consumer doesn't recognize the benefit of education. But, how could that be with your philosophy? You define consumers as being efficient by definition.

You probably blame the Fed for the recession. Too much money in the system. Greenspan does deserve blame for that. Your glorious marketplace also failed miserably. The herd mentality, greed, ignorance and stupidity ran everything into the ground with that Fed money. According to you, consumers and producers are efficient. I guess not!

Your philosophy can whine that there's too much money available because the Fed made a mistake, but you have no alternative.

"Volker hiked interest rates up over night to painfully high levels in order to end a Keynesian stagflationary nightmare in the late 1970’s"

Wrong. Volcker adopted a diasterous quasi-monetarist policy because of the high inflation caused by the second oil shock when the Shah fell from power on January 16, 1979. Supply had already been badly affected when there was a strike in November 1978 by 37,000 workers in Iran's oil refineries. Inflation soared in later 1987 and 1979.

Volcker was appointed in August 1979 after inflation had surged world wide.

No, you fail to understand the true nature of investment, and what constitutes an investment. No semantics involved. Just a failure to understand basic concepts. Only if you are subject to market forces like profit and loss and obtain your revenue by voluntary means is it an investment. It is not that hard to understand. Rothbard will explaining to you here if you have trouble understanding what market forces are and constitutes and investment and government cannot invest.

http://mises.org/daily/1471

No, last time I checked private schools did ok, and our kids got a good education before government schools ever existed. It is the system. Government is the problem. The welfare state and government run schools are at the heart of it.

No, the problem isn’t that people are just too stupid to realize how great state run public schools are. Government and the welfare state create perverse incentives and perpetuate generations of kids of don’t care about school.

Artificially low interest rates on behalf of Greenspan’s Fed is no “marketplace.” It is central bank intervention. It is hard to be efficient when government and the fed are intervening and manipulating the economy, distorting the price system and thereby making economic calculation nearly impossible.

Making economic calculation nearly impossibe is not a good thing if you're lookin for sustainable econonmy. Thats why Austrians want the Fed and the government to refrain from doing thats that make EC hard, at a time when we need it most.

Our alternative is to end the Fed and have free banking and allow consumers to choose the currency that they want to transact in. Throw a gold standard in there too. I can’t speak for every Austrian. But mostly, we want sound money and no central planners in charge of the money supply.

Arguing with statists who have a love affair with the state like Bradk is like arguing with my dog.

Anderson was only restating the fallacious Keynesian position that government "spending", ... generates real wealth

LOL.. If spending does not generate real wealth creation in the private sector, then NO pure private spending of any type (whether debt/credit in a 100% commodity system or money saved from a previous production period) would generate wealth in the private sector either, idiot.

People spend because the economy is growing but the spending in and of itself does not create economic growth. Spending is a byproduct of economic growth, not the cause of it. Economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth.

This wealth generating process is where an individual derives his or her ability to spend from. Spending does not generate real wealth, or does it cause the wealth generation process.

So no, spending does not generate real wealth. In fact like I said, only when people refrain from spending in the present can real wealth be generated.

Spending and production are bound up so tightly, it is a chicken and egg situation.

Economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth."

Again: You live in a fantasy world where there is never unemployment, idle resources, unused capacity in plants, and no international trade by which you can obtain resources for investment.

In the real world capitalism, resourecs are frequently idle and you have international trade.

"Spending does not generate real wealth, or does it cause the wealth generation process. "

If spending does not "generate" real wealth creation in the private sector - in the sense that production of commodities is increased in response to sendingdemand - then NO pure private spending of any type (whether debt/credit in a 100% commodity system or money saved from a previous production period) would generate wealth in the private sector either.

People spend because the economy is growing but the spending in and of itself does not create economic growth. Spending is a byproduct of economic growth, not the cause of it.

Economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth.

This wealth generating process is where an individual derives his or her ability to spend from. Spending does not generate real wealth, or does it cause the wealth generation process.

Nothing you said addressed the central point that spending is a result of economic growth, not the cause of it. The cause of economic growth is when people forgo present consumption to the future, and allow those savings to be channeled into capital investments. That is economic growth.

The spending happens because the growth happens not the other way around. Spending does not generate wealth period. However wealth generation allows spending to happen. Don’t get me wrong, spending is great, we all love spending. But really, it’s not the complicated.

And no, because no one would deliberately kill themselves and stop spending on essentials. However if people dramatically reduced spending by foregoing present consumption, all that would mean is that time preference would shift and that people would value future consumption over the present. That would shift resources into factors of production to meet that future demand. That’s all.

Those idle resources represent malinvestments. They are investments that appeared profitable only under conditions of artificially low interest rates and false price signals that no longer exist. The capital and labor tied up in these malinvestments needs to shift into more profitable and sustainable lines of production that are consistent with consumer demand.

Entrepreneurs will engage in economic calculation by liquidating and shifting much of these idle resources into more profitable ends. More government spending and monetary stimulus delays that process.

However, that is a process that needs to happen in order for the economy to grow in any meaningful and sustainable way. Employing resources for the sake of employing them is counterproductive and actually hurts the economy and undermines real growth.

I was talking about the post WW2 miracle which coincided with massive cuts in spending

Of course, the economy boomed right after the the war: there was a massive surge in domestic demand for consumer goods which had pent up during the war, and that lead to high private consumption and economic growth after 1945, especially after the 1945 tax cut of $6 billion passed in November. The post-war growth to 1948 was an entirely predictable development consistent with Keynesian economics.

In 1943, Keynes was giving a lecture at the Federal Reserve and was asked by Abba Lerner about the possible economic problems of the post-war period. Keynes’ reply is significant:

“Keynes harshly rejected the risk of post-war stagnation, holding that because of Social security there would be a large reduction in private saving and so that would be no problem” Colander, D. C. and H. Landreth (eds), 1996. The Coming of Keynesianism to America, E. Elgar, Cheltenham. p. 202.

And there was a very sharp rise in government spending from 1948 to a 1953? Why?

The second post-WWII recession extended from November 1948 to October 1949. Truman’s budget surplus of 4.6% of GDP in fiscal year 1948 fell to 0.2% in fiscal year 1949, as spending went from $29.8 billion in 1948 to $38.8 billion in 1949, as automatic stabilizers kicked in. In fiscal year 1950 (July 1, 1949 to June 30 1950), the budget went into an actual deficit of 1.1% of GDP. Moreover, Congress had pushed through a tax cut in 1948, which boosted spending in 1949. What we have here is classic Keynesian countercyclical fiscal policy.

"Again: You live in a fantasy world where there is never unemployment, idle resources, unused capacity in plants, and no international trade by which you can obtain resources for investment."

It is all the more clear that you are an economic chronicler with no idea of what real economics is. It appears you haven't heard of two very important concepts in economics called 'gross savings' and 'net savings'. Nor have you learnt the difference between the two.

Even an idle resource in the production system represents forgone consumption. The owner of that idle resource has, at any point in the life of that resource, to 'consume' it. That means that if he has some ends that he can directly attain by consuming that idle resource, he could do so. On the other hand, if he could transfer the ownership of that idle resource to someone else so that he may then use the money thus obtained to get consumers' goods for current consumption.

As long as the idle resource remains in the production system in the ownership of that same owner, there is a forsaking of current consumption that is possible by consuming or exchanging that idle resource.

In fact, in the case where he sells the idle resource to someone else, the buyer needs to forsake current consumption in order to own the idle resource and keep it in the production system.

So, a certain amount of gross saving is required at any point in time to even maintain a production system. This requires a continual forsaking of consumption in the present in favour of consumption in the future. Without this gross saving, you will not have any production system. In fact, maintenance of the capital structure requires net saving every period in order to keep the production structure from deterioration and decay.

So, your statement that the existence of idle resources negates the requirement of saving in order to maintain a system of production is downright idiocy and a statement that only an economic ignoramus can make.

You surely seem to be one. Now!!! Off you go to your echo chamber to try to refute/respond to this one. Shoo!!!

And, how about the transistor, computer and the Internet? The government initiated research in all of them.

The transistor is generally credited to Bell Labs, which was certainly private (but was a monopoly) with their investment in the telephone system providing both money and the incentive to study methods to improve that system. A surprisingly large number of discoveries came out of this,

The computer came from various places, probably the theoretical work of Alan Turing was significant, and Turing's useful published papers came out of Cambridge. That's a difficult case given that the founding of Cambridge goes right back to feudal times and over the years Cambridge has accepted a mix of private, government and church money. The work that Alan Turing did for his government during WWII was all destroyed, and Turing himself was destroyed by that same government, due to their intolerance of his homosexuality.

It is a little known fact that Alonzo Church actually published similar results as Turing slightly earlier (and independently), and Church was the product of many US universities (including Princeton) once again a mix of government money and private contributions.

Of course John Von Neumann really must be mentioned, and he was just a freak genius, someone who would have done well under any economic system, probably even a dictatorship (although he chose to spend his life in the USA so it shows that a culture of freedom can attract great minds). Von Neumann was involved in anything and everything so of course his government made use of him (mostly for warfare purposes) but then again, if government had not wanted him, any private employer would have. Fortunately, most of the work of Von Neumann was not destroyed and is now of benefit to the people of the world.

The last mention would have to be the Intel 4004 which is the earliest ancestor of nearly every modern desktop computer, and the lineage is entirely private and was driven by private enterprise both on the supply side and the demand side (even its close competitors were private).

The origin of the Internet is a very special case of government investment. Actually the development of Internet Protocol had nothing to do with inventing any network technology, because large numbers of private networks and proprietary designs existed long before work on IP was even started. If anything, the design of IP was just a rehash of existing ideas with perhaps some middle of the road engineering compromises made in order to deliver a design that while not particularly brilliant at anything in particular was neither disastrously bad at anything (and that's more important than people realize).

When IP was first starting, people said stuff along the lines of, "Oh God, the last thing we need is another network protocol". However, the great boon of IP that allowed it to take over the world is that the private companies were very defensive of their intellectual property, and they made sure none of their network equipment was compatible with anyone else's network equipment.

So IP delivered a neutral ground where all products were compatible, so manufacturers could compete on performance and price, rather than competing on lock-in proprietary products that attempted to monopolize segments of the market.

This is an example of the complexity of property rights. In the normal case, private property solves the problem of "The Tragedy of the Commons", but it is important to understand the the opposite extreme also exists which is known as "The Tragedy of the Anti-Commons" and public property rights are necessary for best efficiency.

One of the proper roles for government is to establish a suitable balance of property rights in order to deliver both the incentive for individuals to strive for excellence (i.e. a reasonable expectation that they can keep most of the rewards of their effort) and also maintain a competitive playing field whereby newcomers can enter the game and established players cannot achieve a dominant monopoly position.

Many people believe that Internet Protocol was a great invention -- it was not. The breakthrough that IP delivered was "un-sticking" the logjam of the private network protocols.

It turns out that the chart you linked to doesn't include Social Security or Medicare. How stupid do you think we are?

Social Security (at least in principle) represents the instantaneous transfer of wealth away from young people buying into the scheme and towards older people who are cashing out. Since all of the old people were once young themselves, in theory they are getting back their own wealth in a time-shifted form. It should be revenue-neutral and therefore neither spending nor saving.

I've said "in principle" and "in theory" a number of times, because there is some evidence that the current implementation of Social Security does not live up to the advertised specification. We could of course argue whether a private system would do any better. In Australia it is compulsory for a percentage of income to go into "superannuation" but you can choose (to some extent) which fund you want to manage this. We have yet to discover whether this scheme does actually work, but it is a better design than trusting the government to manage your retirement.

You also miss the point that the development of modern computers also occurred in Japan, where this happened through direct Japanese government industrial policy though their Ministry of International Trade and Industry (MITI) (Kenneth Flamm, Mismanaged trade?: strategic policy and the semiconductor industry, 82ff.):

“The real success of Japanese producers, American industry sources conclude, came only after the mid-1970s. [The Ministry of International Trade and Industry] targeted the computer and telecommunications markets as central to Japan’s future. Establishing a national goal to lead in those industries, the government offered substantial incentives to encourage R&D and investment, besides restricting foreign access to Japanese markets.”

Competitive edge: the semiconductor industry in the U.S. and Japan, p. 17

Of course, the economy boomed right after the the war: there was a massive surge in domestic demand for consumer goods which had pent up during the war, and that lead to high private consumption and economic growth after 1945, especially after the 1945 tax cut of $6 billion passed in November.

The doctrine of "pent up demand" is fallacious. It is literally a valuing of the absence of wealth as opposed to wealth itself. As if the presence of wealth serves as a hindrance because it allegedly represents a depleted supply of consumer desire, thereby supposedly only ensuring a weak consumer demand. Prosperity allegedly depends on the absence of wealth, and poverty follows from its abundance, because that priceless commodity, "consumer desire", more limited in supply than diamonds, is produced by the absence and consumed by the presence of wealth.

This is just more of the same consumptionist shit that permeates Keynesianism.

The post-war growth to 1948 was an entirely predictable development consistent with Keynesian economics.

No, it was not you fool. Right after the war ended, when the prospect of a massive decline in government spending was on the table, the Keynesian economists predicted that the economy would sink back into depression if the government did drastically reduce its spending. They were embarrassed when the real economy actually ended up growing substantially.

Government spendiong surged from about 15% of GDP in 1948 to about 24% by 1953%

That's because the economy went into recession in the early 1950s. So the fall in government spending that took place over that time, which helped the economy grow, coincided with an increase in spending relative to GDP in the early 1950s.

This involved Truman's Fair deal, other social spending, and increased military spending.

Which when coupled with inflation set the stage for an unsustainable bubble during the 1960s, culminating in yet another recession.

You live in a fanstay world where there is never unemployment, idle resources, unused capacity in plants, and no international trade by which you can obtain resources for investment.

You live in a fantasy world where the government never causes unemployment due to its deficits, can always target and affect unused resources only when it spends, and that mercantilism benefits local economies.

ABCT is total B.S., as is your statement

You have not once shown where ABCT is wrong.

Wrong. Total US government spending surged again after the war from 15% of GDP in 1948 to about 24% by 1953%.

No you idiot, government spending fell. The reason why it rose relative to GDP was because the economy went into recession in the early 1950s, which of course was generated by the government's past actions.

Wrong. Volcker adopted a diasterous quasi-monetarist policy because of the high inflation caused by the second oil shock when the Shah fell from power on January 16, 1979.

No, the high inflation during the 1970s was caused by the Fed's prior printing of money. The doctrine that oil prices can cause general inflation ignores the fact that if people spend more for oil, then in an absence of inflation of the money supply, spending more on any one thing requires people to spend less on other things. But that is not what happened. The general price level went up.

LOL.. If spending does not generate real wealth creation in the private sector, then NO pure private spending of any type (whether debt/credit in a 100% commodity system or money saved from a previous production period) would generate wealth in the private sector either

No you stupid tool. The argument is that spending qua spending does not grow the economy, only a specific type of spending, namely, saving and investment. Keynesians do not delineate between forms of spending. If the government spends $1 trillion on fake dog poop, or if they spend $1 trillion on war, or if the private sector invests $1 trillion in civilian goods production, to the idiot Keynesian, they are all economically equal, because all that matters is "spending qua spending."

To see how stupid this statemnet is: ask yourself what would happen if all spending stopped?

Spending would only stop if production stopped first you moron. People don't just arbitrarily stop spending as in the Keynesian worldview. Spending comes out of production, not the other way around. In order for something to even be called money, it has to be produced first. Production drives spending and consumption, not the other way around.

Spending and production are bound up so tightly, it is a chicken and egg situation.

Only to the moron Keynesian who views the economy as circular logic, excuse me, as circular flow.

Keynesians heads are in a constant spin because of the incorrect way they approach the economy.

The economy is temporal IN ONE DIRECTION ONLY. The order is action based. Production then consumption. If something is going to be used as money, it must first be produced.

If you instead viewed the economy not as circular logic, but as one directional logic, you would not view spending and production as simultaneous.

The chicken came first by the way.

"Economic growth comes when people refrain from spending in the present in order to save for the future which allows the accumulated savings to be channeled into capital investments that produce real wealth."

Again: You live in a fantasy world where there is never unemployment, idle resources, unused capacity in plants, and no international trade by which you can obtain resources for investment.

What is said in quoted is not contradicted by the existence of unemployment, idle resources, unused capacity, nor international trade.

If there is unemployment, idle resources, unused capacity, and international trade, then these do not at all imply that the solution is more spending. If you saw a formerly drunk person getting a hang-over, would the solution be to give him more alcohol? No.

The existence of unemployment, idle resources, unused capacity, mean that their orientation and intended use are NOT CORRECT and not in line with real consumer preference.

You moron Keynesians take unemployment, idle resources and unused capacity as if their mere existence justifies a value that only government spending can truly exploit. In reality, widespread unemployment, idle resources, and unused capacity brought about by the Fed's boom bust cycle means that the workers were put into the wrong areas, resources were produced that shouldn't have been produced, and capacity was made that should not have been made.

It does not mean that YES FINALLY GOVERNMENT SPENDING HAS A PURPOSE!!! That is just a crack addict using any excuse whatsoever to justify taking another hit.

I wouldn't deny that government supported programs have at times produced valuable goods and services. The point is that this does not change economic theory or disprove Austrian theory. Due to problems of economic calculation and transparency, government programs are necessarily going to be inferior to voluntary arrangements and you cannot see what you have given up in the bargain. It is no coincidence that the adoption of Keynesian style programs in western countries in the 1930s led to horrendous war. The fire bombing of Dresden and the slaughter of innocents at Hiroshima comes with the bargain.

The most excellent original tape recorder was developed under the Nazis.

http://en.wikipedia.org/wiki/Ampex

Does the fact of the triumph of the USSR in WWII or the launch of Sputnik support an argument for Stalinism as an economic model for sane and moral people to emulate?

Where might the world have found itself in 1946 if there had been no central banks, no WWI, no socialists, no National Socialists, no Keynesians and no WWII?

For purposes of this web site, government spending is not the cure of business cycles although a nice bridge or stadium may have been built with government funds or a scientific breakthrough may have been so funded.

The basic Austrian concepts of ignorant acting man and the essential nature of economic calculation are analogous to the atomic and molecular structure in chemistry. The Austrian concept of the capital structure is analogous to human anatomy and is based upon the more basic foundational concepts. Similarly, you really cannot explain how a human or a race horse runs without understanding the more fundamental concepts of both chemistry and anatomy.

Neither the Keynesians nor MMTers even have such detailed foundational concepts in their “systems”. All they can do is watch the race horse run and try to explain it while remaining purposefully ignorant of the more fundamental issues of basic chemistry and anatomy. Thus, their obsessive but silly focus upon historical anecdotes to “prove” their unfounded “theories” and their embarrassing incomprehension regarding the more basic and essential concepts of economics.

The 1948 tax cut would be denounced as a "tax cut for the rich" by leftists like yourself. This tax cut, along with the one in 1945, was heavily supply side in nature. Of course, due to the fact that it seemed to work, you call it "keynesian coutercyclical policy".

This is the same thing Paul Krugman does. Every time fiscal stimulus fails, it is because it wasn't made correctly or it wasn't large enough. Likewise, every time a free market policy works, it was because it was really keynesian (much like you claiming the 1948 tax cut was keynesian in nature).

According to classic Keynesian economics, the economy should have tanked after the war. Yet, it didn't. It prospered instead. Keynes may have known that this may happen, but almost every other Keynesian cried disaster once war spending started decreasing.

You ignore the fact that Keynesian economics has numerous fatal flaws theoretically and has been disproven empirically.

Almost all research now shows that the Keynesian New Deal extended the Great Depression and the real recovery didn't begin until after World War II.

I can already hear your response. "The reason the Great Depression lasted so long is because Roosevelt didn't spend enough." Of course, there were previous depressions in which the economy recovered much quicker without any fiscal or even monetary stimulus.

As for government spending increasing during the late 1940s and early 1950s, you're right. In 1948, the Federal Government spent 11.6% of GDP, and, by 1953, it spent 20.4% of GDP.

This of course, is a highly cherry picked piece of data. First, 1953 was, by far, the highest year of government spending until 1968, mostly due to the recession. Likewise, 1948 was a very low year, lower than any year since 1940.

You're missing the larger picture. From, 1944 to 1948, government spenidng fell from 43.6% of GDP to 11.6% of GDP, and then went slightly back up to average in the high teens for the rest of the decade.

According the Keynesian theory, governemnt spending falling from 43.6% of GDP to 11.6% of GDP would mean depression. The Deficit fell from 30.3% of GDP to a surplus of 4.6% of GDP.

Of course, you call a 1.1% deficit countercyclical Keynesianism. Right now we are running deficits over 10% of GDP, about 10 times larger. Would you support, as I do, immediatley bringing down deficits to 1.1% of GDP?

Of course, modern Keynesians call that kind of deficit reduction self defeating austerity. But, when it benefits your argument, a deficit of 1.1% of GDP is plenty Keynesian. Right?

During the recession of November 1948–October 1949, Truman increased government spending, and spending increased in absolute amounts in every year from 1949-1953.

When Truman cut spending in 1954, this was because the Korean war ended, and a minor recession occured from July 1953–May 1954, which ended through a deficit, automatic stabilizers and tax cuts in 1954.

if they spend $1 trillion on war, or if the private sector invests $1 trillion in civilian goods production, to the idiot Keynesian, they are all economically equal, because all that matters is "spending qua spending."

= sheer idiotic straw man.

"Spending would only stop if production stopped first you moron. People don't just arbitrarily stop spending as in the Keynesian worldview. "

= red herring.

I repeat: what would happen if all spending stopped?

"Production then consumption. If something is going to be used as money, it must first be produced."

The most stupid and false statement yet. In real world fractional reserve banking and fiduciary media have ALWAYS caused spending - either consuption or cpaital goods investment - that isn't backed up by previously prodcued commodity money.

A simple fact from history:

“[the] reconciliation of high rates of economic growth with exchange-rate and gold-price stability [in the 19th century] was made possible … by the rapid growth and proper management of bank money, and could hardly have been achieved under the purely, or predominantly, metallic systems of money creation characteristic of the previous centuries. Finally, the term ‘gold standard’ could hardly be applied to the period as a whole, in view of the overwhelming dominance of silver during its first decades, and of bank money during the latter ones. All in all, the nineteenth century could be far more accurately described as the century of an emerging and growing credit-money standard, and of the euthanasia of gold and silver moneys, rather than as the century of the gold standard.” (Triffin, R. 1985. “Myth and Realities of the Gold Standard,” in B. Eichengreen and M. Flandreau (eds), The Gold Standard in Theory and History, Routledge, London and New York. p. 153).

Triffin (1985: 152) estimates that in 1800 bank money or credit money probably constituted less than 33% of the money supply. But by 1913 paper currency and bank deposits accounted for 90% of overall currency circulation in the world, and actual gold itself for not much more than 10%.

The natural rate is just the rate that would occur absent artificial credit expansion and or central bank intervention of any sort. Even if you deny the fact that the natural rate is whatever would exist absent some form of intervention that does not negate the fact that when rates are suppressed below their market levels (even if you don’t know exactly what that market level would be) they still cause misallocations of resources that result in economy wide malinvestment.

In order words, artificially low interest rates still cause problems in the economy by distorting the price system making economic calculation nearly impossible.

Denying that a natural rate exists=no refutation of ABCT FRB and fiduciary media artificially lower interest rates thereby creating consumption or capital goods investment in areas of that would likely have not occurred absent the FRB and FM.

You can expand FRB and FM all you want but that won’t magically make goods and services appear. Production still comes before spending. Giving people currency to “spend” does not make goods magically appear on the shelves.

The ability to spend still hinges on one’s ability to produce, and the fact that people spend because the economy grows but spending in and of itself does not grow the economy still holds.

Forgoing present consumption in order to save for the future, which allows those savings to be channeled into capital investments that produce real wealth, is what grows an economy. That wealth creation process is what enables people to spend. No wealth creation, no spending. You still have said nothing to refute that.

Anyway you look at it; we cut government spending after the war dramatically. No recession. The economy can grow and prosper without all kinds of government spending on political pet projects. Government spending is not necessary or required for economic growth, or to "stimulate" the economy out of recession as if such a thing was even possible.

Noam Chomsky fails to demonstrate that the government R&D spending on early computers actually delivered anything. Nothing impressive about spending massive budgets, show me the actual breakthrough that we purchased for that money.

The other big breakthrough was the invention of the integrated circuit which also came out of private research as Texas Instruments and Fairchild Semiconductor ... eventually leading up to the founding of Intel.

If you want to look at the early days of Fairchild Semiconductor, the initial team used money from the own pockets to bootstrap their first transistor process and then took investment money from Fairchild Camera and Instrument Corporation. Their first customer was IBM. Products that used the early Fairchild technology were radios, and test and measurement instrumentation.

It is true that the Pentagon did buy electronic equipment, but so did the private market. There is absolutely no evidence that private buyers needed to be coerced into buying such equipment. Since the military spending was only tax dollars anyhow it was merely taking away the ability of private investors to use their money (as it always does).

There's a fundamental problem with government funded research labs -- they researchers are getting paid to look busy, not paid to actually deliver anything. In a private environment they have genuine incentive to deliver a product. All of the key breakthroughs in the computer industry came out of this private incentive and were directly made into deliverable products.

Yes some big clunky computers such as ENIAC and EDVAC existed before the microprocessor, and at great expense some logical techniques were pioneered. However you only have to look at how the software industry exploded after the microprocessor to see that the early clunkers were pretty much dead ends. Even if none of that government funded research of the early 50's had happened, it would all have been caught back within a year or so once integrated circuits became standard.

The fact that Americans had accumulated vast savings during the war ($100 billion by 1944 including $43 billion in savings and money), but could not spend the money on consumption, had nothing to do with the massive surge in consumption that occured after 1945.

Seems a bit more plausible that the removal of rationing might have had something to do with it. Also the massive productivity that had been diverted into the war effort was now available for other purposes.

Those people could have had arbitrary billions in savings as nominal figures in some account, but it would not have made a bean of difference if goods were still rationed and unavailable.

If taken to the extreme, people would stop producing for each other, but they would still be producing for themselves. This is where an economizing society would have its origins. Production for oneself, where surpluses are saved and used to purchase (trade for) goods from other people and so on…

“[the] reconciliation of high rates of economic growth with exchange-rate and gold-price stability [in the 19th century] was made possible … by the rapid growth and proper management of bank money, and could hardly have been achieved under the purely, or predominantly, metallic systems of money creation characteristic of the previous centuries.

Monetary crank nonsense from a monetary crank. This old myth has been refuted so many times, from Hume, to Smith, to the marginalists, to so many others that to hold it is to believe in flying pink unicorns.

"If you saw a formerly drunk person getting a hang-over, would the solution be to give him more alcohol? No. "

This assumes the false and absurd ABCT. There is no unique natural rate of interest in any growing economy with money, just as there is no such rate in a growing barter economy.

No such unique rate of natural interest = ABCT is B.S

The notion that more money printing can solve the problems of past money printing assumes the absurdity of Keynesianism.

The concept of natural interest is not at all threatened by your straw man treatment of it.

There is such a thing as natural interest. It is the natural rate at which an individual discounts future goods as opposed to present goods, on account of their time preference.

Your nonsensical response to it, by claiming that because it is espoused as a singular concept, that is must mean there is only one rate for everyone, is both laughably absurd, if not so tragically uninformed.

Now quick, cite the same Hayek-Sraffa passages over and over again and I will keep refuting it over and over again.

I see!! The fact that Americans had accumulated vast savings during the war ($100 billion by 1944 including $43 billion in savings and money), but could not spend the money on consumption, had nothing to do with the massive surge in consumption that occured after 1945.

They could not spend the money on consumption because there were price controls in effect. Once those price controls were lifted, the prices adjusted to the new monetary conditions, including the massive inflation the government engaged in to pay for the war.

The doctrine of "pent up demand" is not what you just said it is, whereby people save large quantities of cash, and then finally spending it on consumption. The doctrine of pent up demand is advanced as a psychological phenomena, not a monetary phenomena.

I was talking about Spending as a percentage of GDP, which was higher in 1953 than it was in any year until 1968. This is a fact, not debatable.

As for your argument for pent up demand, that is fallacious. Your argument for pent up demand causing the post war miracle is a futile attempt to shield the failure of Keynesianism. You well know that if the war ending did cause a depression you would claim that it was because of the fall in war spending. Kind of a Heads I win, Tails you lose...

According to mainstream Keynesian theory, the massive spending reduction should have caused mass suffering, it did not. The real suffering took place during the New Deal and World War II.

One clear look at history shows that Keynesianism is a complete an utter failure. It is based on fallacious underconsumptionist fallacies that were disproven in the 18th century. How much more suffering will it take for the world to realize how wrong Keynes was?

Has "Lord Keynes" hit upon the reason why Keynesians and MMTers simply cannot comprehend basic Austrian concepts just like the Martian who cannot comprehend how human children can quickly learn languages?

III. Cognitive Closure?There are some philosophers like Colin McGinn and even Noam Chomsky who claim that human beings are subject to a phenomenon called cognitive closure, the belief that certain problems are insolvable, and that our minds are “closed”: that our minds are subject to cognitive limitations such that we cannot begin to understand certain ideas and concepts or solve some problems.

Seems a bit more plausible that the removal of rationing might have had something to do with it. Also the massive productivity that had been diverted into the war effort was now available for other purposes.

For christ's sake, that's what I alreay said, idiot.

And without their savings they would have had no money to purchase commodities.

"According to mainstream Keynesian theory, the massive spending reduction should have caused mass suffering, it did not. "

Total B.S.Reducing wartime spending and freeing up resources for production of consumer goods, when millions of Americans had billions of $ in savings and wanted to consume, caused prosperity, EXACTLY as John Maynard Keynes himself predicted.

America had extraordinary prosperity and an outstanding period of real output growth and productiivty increases under Keynesian macroeconomic management, as did country after capitalist country all OVER the whole world.

"The natural rate is just the rate that would occur absent artificial credit expansion and or central bank intervention of any sort. "

No, it isn't. And you show yourself laughably igorant of the Austrian economic you claim to support.

If you want to know what the "natural rate" is, then read Roger Garrison:

“So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy’s productive capacity in ways that are consistent with people’s willingness to postpone consumption. .... In summary terms, the natural rate is seen as an equilibrating rate. It is the rate that tells the truth about the availability of resources for meeting present and future consumer demands, allowing production plans to be kept in line with the preferred pattern of consumption. By implication, an unnatural, or artificial, rate of interest is a rate that reflects some extra-market influence and that creates a disconnection between intertemporal consumption preferences and intertemporal production plans” (Garrison, R. W. 2006. “Natural and Neutral Rates of Interest in Theory and Policy Formulation,” Quarterly Journal of Austrian Economics 9.4: 58–59).

This is NOTHING but the unique Wicksellian natural rate, as in Hayek’s work, which was totally destroyed by Sraffa in 1931.

So Sraffa dreamt and so do you dream now. What Sraffa wrote was a load of rot. It's good enough for whatever-Keynesian half-brained creatures, but not for human beings who are still capable of thinking.

"So Sraffa dreamt and"... etcLOL... If that is why you dismiss Sraffa's argument, it is a mere ad hominem fallacy.

Or else a sign of desperation by resorting to mere laughable name-calling:

"So Hayek the idiot dreamt then and so do you dream now. What Hayek wrote was a load of rot. It's good enough for whatever-Austrian half-brained creatures, but not for human beings who are still capable of thinking."

Arbitrage ensures that these 'different' interest rates on different commodities do not move out of step with each other. That Sraffa did not realise this is really sad. That you do not realise it even after my explanation is even sadder.

And you are still evading giving a response to the demolition of your pet concept of how idle resources implies that forsaking consumption in the present is not required for investment in production. The key words are 'gross savings' and 'net savings'.

Arbitrage ensures that these 'different' interest rates on different commodities do not move out of step with each other.

This solution is tried by Lachmann, but doesn't work either:

“This overall equilibrium of interest rates constitutes a third type of equilibrium which is neither Sraffa’s nor Hayek’s. It need have nothing to do with costs of production, but neither is it entailed by the equality of demand and supply in commodity markets. It requires a vigilant and efficient arbitrage acting between markets, a special type of entrepreneurial action and institutions appropriate to it. What Hayek should have said is not that there might be as many rates of interest as there are commodities all of which would be equilibrium rates, but that only some of them would be. While overall equilibrium requires equality of demand and supply in each single market, the latter is not a sufficient conditions of the former.”

Nice to see a truckload of nonsense in response. Let me deal with them one by one.

"(1)factor inputs are easily available through international trade;"

As nonsensical as they get. It is not about how 'easily' the inputs are available but the simple fact that the capitalist who pays for the factors is forsaking consumption in the present to get the future goods that the factors will churn out.

"(2) there is large body of unemployed ready and willing to work;"

Once again, the capitalist who pays these unemployed masses have to forsake consumption in the present to employ these factors to produce lower order producers' goods or consumers' goods well in the future.

"(3) plants have low capacity utilization rates;"

The capitalist has the option of selling the 'surplus' capacity to other people and using the money to buy consumers' goods. That he does not do so implies that he is forsaking consumption in the present. If he does sell, the buyer is forsaking consumption inthe present (exactly what I said earlier and which you are blissfully ignoring)

"(4) business have a stock of unsold commodities in inventories that they WANT sell, and"

Unsold commodities in the hands of sellers are producers' goods of the 1st order. The producers have the option of consuming these commodities themselves. That they are not doing so implies that they are forsaking consumption in the present.

"(5) raw materials are lying in the ground or available in stocks but no one wants to purchase them."

Raw materials lying in the ground and untouched are the very definition of 'sub-marginal' natural resources. That they are present does not deny the need to forsake consumption in order to maintain a production system.

As for raw materials lying in stock, note how deviously you state "no one wants to purchase them". Let me complete it for you. "no one wants to purchase them at the price the seller wants to sell them at. The seller does not want to sell them at the price the buyers are ready to pay". This is called reservation demand.

If the sellers were ready to accept a lower price, they are sure to get money that they can use to get consumers' goods. That they do not do so and instead hold on to the inventory implies that they are forsaking consumption.

"While overall equilibrium requires equality of demand and supply in each single market, the latter is not a sufficient conditions of the former."

The error, as I see it, is in talking of equality of demand and supply in each single market. The real equilibrium is to be understood across markets. That's how arbitrage works. You sell in the high priced market and buy in the low priced one.

And you are as usual, idiotic to the core. Take your statements for instance.

"They will pay for the resources they obtain by debt or previous profits."

You moron!! They have the option of using their previous profits to get consumers' goods. To invest in production, they need to forsake these consumers' goods. And when they take debt, the creditors are the ones doing the forsaking. Without the forsaking of consumption by the creditors, they would not have the capital for investment in production.

Of course, in a funny money world where the banking system can create money out of nothing, the forsaking is not on the part of the creditor but on the part of every holder of the money unit. The only difference is that this forsaking is not voluntary but forced on them by the banking system. Call this 'forced saving' for all I care, but it is a forsaking of consumption all the same.

So, moron, go back to your echo chamber and scream to your heart's content. What a retard!!!! And your ideas are more in tatters than they were before. You have just shown that you are more retarded than I had ever contended.

"To invest in production, they need to forsake these consumers' goods."

Capitalists who have accumulated previous profits in a fund do NOT go about buying consumers goods with it, you idiot: they

(1) investment it in financial assets (including the business equivalent of demand and savings accounts) or

(2) further capital goods investment.

Any management that spent its profits or funds on "consumer goods" would be out the door, dismissed by the owners or shareholders.

"And when they take debt, the creditors are the ones doing the forsaking"

From the beginning modern capitalism has had fiducary media and fractional reserve banking, endogenously expanding the money supply, removing the need for direct "savings". This works because capitalism has idle resources in many periods of time.

Your fanasty theories have never applied to the real world.

"Of course, in a funny money world where the banking system can create money out of nothing, the forsaking is not on the part of the creditor but on the part of every holder of the money unit."

You have a crude and ridiculously simple model of price inflation.

Even other Austrians would call you on your B.S.:

“the essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services .... While increases in money supply (i.e., inflation) are likely to be revealed in general price increases, this need not always be the case. Prices are determined by real and monetary factors. Consequently, it can occur that if the real factors are pulling things in an opposite direction to monetary factors, no visible change in prices might take place. In other words, while money growth is buoyant – i.e., inflation is high – prices might display low increases.”

You never cease to amaze or amuse. I just said you are more retarded than I ever contended and how quick you are to demonstrate that you are more retarded than I thought when I said that.

"Capitalists who have accumulated previous profits in a fund do NOT go about buying consumers goods with it, you idiot:"

You moron! Capitalists eat out of the profits they make on their investments. Their clothes, homes, vehicles, vacations, etc., all come out of their profits, you retard. And look at the prize idiocy in your statement.

"do NOT go about buying consumers goods with it, you idiot:"

You freaking retard! It's not about what they usually end up doing but what they COULD do with that money. The option of using it to buy consumers' goods exists. You need to be an obstinate mule to refuse to acknowledge that even now.

And with this, you really take the cake.

"Any management that spent its profits or funds on "consumer goods" would be out the door, dismissed by the owners or shareholders."

You freaking, freaking retard! The 'management' of a firm are NOT capitalists but LABOUR. And I am not taking of managers spending the money on consumers' goods but the shareholders and other owners. I do understand that seeing his pet theories torn to shreds and smashed to pulp can make a man go insane and blabber incoherently, but your reaction is far worse than that.

"You have a crude and ridiculously simple model of price inflation."

I do understand the Austrian concept of price inflation. Even under the concept of prices being higher than they WOULD HAVE BEEN but for the inflation (increase in money supply), there is consumption being forcibly taken away from them by preventing their money from gaining purchasing power. So, there is still (forcibly) forsaken consumption.

So, freaking, freaking, freaking retard, go back to your echo chamber. You will at least save yourself the embarrassment of letting everyone know how retarded and brain dead you are.

Any management that spent its profits or funds on "consumer goods" would be out the door, dismissed by the owners or shareholders.

But they would only be doing what you Keynesian morons say grows economies!

From the beginning modern capitalism has had fiducary media and fractional reserve banking, endogenously expanding the money supply, removing the need for direct "savings". This works because capitalism has idle resources in many periods of time.

Fiduciary media and fractional reserve currency is why from the beginning of modern capitalism we've had booms and busts.

And the introduction of such fiduciary media does not mean that "direct savings" is no longer needed. Introducing fiduciary media into the economy, even if it begins as investment, will still generate the business cycle as soon as any portion of the money is used as consumption. Since it is a virtual guarantee that laborers of these credit expansion financed investment projects will spend their wages on consumption, it will mean a bust is inevitable.

And even if there are idle resources, credit expansion (and government spending) cannot only target those idle resources. Just because there are idle resources, that doesn't mean people necessarily want to use them if only they had more paper money. Idle resources in capitalism are liquidated. Many idle resources in a central bank manipulated economy are caused by the central bank through leading to malinvestment of resources. ABCT is correct.

They could not spend the money on consumption because there were price controls in effect.

LOL... I already said that

No, you didn't.

, idiot.

=ad hominem

In other words, my statment is CORRECT.

No, you're statement is laughably wrong. Pent up demand does not mean what you think it means. It does not mean "forced" savings through price controls coupled with inflation of the money supply, after which time the price controls are lifted and that enables spending to rise.

It means CONSUMER spending rises after a period where, for non-monetary reasons, consumption spending was "too low." For example, many Keynesian morons believe that an absence of consumer goods itself serves as a source for prosperity, as the "need" leads to people allegedly spending more on consumption compared to if they bought and consumed more consumer goods.

What the hell does it "ignores adjustment for inflation of the money supply", even mean

Idiot, it means that if the money supply doubles, and yet government spending rises by less than double, then government spending fell in real terms.

No you stupid retard. By the regression theorem, money ARISES out of production. It does not precede production.

= red herring.

No, it is not a red herring. It is what proves your nonsense wrong. Production precedes consumption, it precedes money, and it even precedes government.

You monetary cranks believe money is the starting point for all things economic.

You have been defeated and now you're attempting to switch the topic to something different.

Nope. You've already lost a long time ago.

Total B.S.

red herring

Reducing wartime spending and freeing up resources for production of consumer goods, when millions of Americans had billions of $ in savings and wanted to consume, caused prosperity, EXACTLY as John Maynard Keynes himself predicted.

LOL. Even by your own stupid logic, Americans accumulated $43 billion in cash savings by 1944, and after the war ended, government spending fell by over $60 billion by 1948. There should have been a depression as Keynes predicted.

America had extraordinary prosperity and an outstanding period of real output growth and productiivty increases under Keynesian macroeconomic management, as did country after capitalist country all OVER the whole world.

No, America had extraordinary prosperity because 1. Our economy was not blown to bits. 2. We had a massive decline in government spending.

Japan and Germany grew post WW2 rapidly because of their high savings rate.

Government spending measured against the inflation of the money supply fell post WW2.

http://pw1.netcom.com/~rdavis2/cpi_m2.html

M2 rose by no less than 12% per annum in the years during the war, rising to over 26% by 1943. Post war, once that money spread throughout the economy, the rise in nominal government spending was nowhere close to the prior inflation. That means government spending FELL as against said inflation, which proves my original argument correct, and yours as absolutely wrong.

Like I said before, denying that a “natural rate” exists then copying and pasting something that Roger Garrison wrote about it does not refute the central point of ABCT that suppressing interest rates by artificial credit expansion below what they otherwise would have been absent the monetary intervention misallocates resources into unsustainable lines of production that result in economy wide malinvestments.

These projects that appeared profitable during the boom phase under phony conditions of super low rates need to be liquidated and the resources tied up in those malinvestments need to be re allocated to more profitable ventures. Government spending and monetary stimulus prevents that necessary reconfiguration process from occurring.

Denying a natural rate exists does not refute ABCT. Super low rates really still do damage to the economy by igniting the boom bust cycle. Keeping them super low prevents the necessary reallocation process that needs to occur in order to have any meaningful recovery.

LK has meticulously ignored the take downs of his statist Keynesian ideas that Bala, Major Freedom, and myself have presented him. What else is new.

"Fiduciary media and fractional reserve currency is why from the beginning of modern capitalism we've had booms and busts."

LOL..So ALL cycles are the result of ABCT??So there NEVER been ANY genuine inevstment and output growth in all of capitalist history?

Alternatively, if you think there was real output growth in the 19th century, then even with ABCT occuring you can still have real and very signifcant output growth, demonstrating that (even if true) ABCT is vastly exaggerated.

Even by your own stupid logic, Americans accumulated $43 billion in cash savings by 1944, and after the war ended, government spending fell by over $60 billion by 1948. There should have been a depression as Keynes predicted.

"...holding that because of Social security there would be a large reduction in private saving and so that would be no problem."

In other words, Keynes thought that because the government would counteract the decline in war spending with social security spending, he anticipated government spending NOT FALLING, or at least reverse any cash savings.

If he was asked whether there will be a post war slump if the government does not counteract the cash hoarding by spending more, if the government decreased spending as such, then he would have said yes, there would have been a post war slump.

Since the government did decrease spending (which Keynes did NOT anticipate when he made that statement), there should have been a slump.

In which case, you can still have real and very signifcant output growth, demonstrating that (even if true) ABCT is vastly exaggerated.

=straw man.

ABCT does not argue that growth is impossible in a credit expansion economy.

The malinvestment that takes place in a credit expansion economy is not universal for all investment. In many cases, investors do correctly guess the real natural interest rates in the economy, and thus they are able to generate real growth. Other investors are mislead by the artificially low interest rates generated by the central bank. Housing for example. There are millions of homes that are collecting dust and thus represent a waste of resources and thus a reduction in growth.

"If he was asked whether there will be a post war slump if the government does not counteract the cash hoarding by spending more, if the government decreased spending as such, then he would have said yes, there would have been a post war slump."

LOL.. When your (1) falsehoods or (2) lies are exposed, you resort to outright invention.

Keynes meant in the quote above that private savings would fall and be spent on consumption after the war ended, which is exactly what happened.

That is garbage: Keynes understood well that the end of the war would see a large reduction in war spending.

Moron, I didn't deny that. The point is that Keynes did not foresee a decline in government spending as such that would fail to counteract cash savings.

If he was told what the government would have done in terms of total spending, meaning if he was told "Keynes, (not you, the real Keynes, LOL) the government is going to decrease total spending, and the decline in government spending ($60 billion) will be greater than what will be spent out of accumulated cash savings ($43 billion)", then he would have said there would have been a slump. But there wasn't. Keynes was refuted, and his followers were refuted.

LOL, when you get refuted, you resort to misrepresentation and mischaracterization.

You're retreating once again.

Keynes meant in the quote above that private savings would fall and be spent on consumption after the war ended, which is exactly what happened.

No, Keynes could not have meant that because Social Security, the very thing he believed would counteract the fall in war spending, is ALSO a government expenditure you stupid shit for brains.

He thought that there would be no post war slump because the fall in war spending would be offset by the rise in Social Security spending, which of course means if total government spending fell, then he would have expected a slump.

He didn't expect a slump because he didn't expect a fall in TOTAL government spending that would fail to offset any cash savings in the market. By "soaking up" the cash savings in the form of Social Security spending, the government according to Keynes would be able spend more there to offset the fall in war spending.

(1) everyone knew well that the end of the war would see a big declint in government spending and transition from a wartime to a peacetimr economy: that was a necessary transition and in the US was the so-called downturn of 1945 hwre GDP fell by 12.5%:

Feb–Oct 1945The decline in government spending at the end of World War II led to an enormous drop in gross domestic product making this technically a recession. This was the result of demobilization and the shift from a wartime to peacetime economy. The post-war years were unusual in a number of ways (unemployment was never high) and this era may be considered a "sui generis end-of-the-war recession".http://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

Keynes knew such a slump would happen, but he rejected the idea that there would be any return to 1930s depression or stagnation because economy would now be driven by increased consumer spending and American drawing down savings for consumption.

"He didn't expect a slump because he didn't expect a fall in TOTAL government spending that would fail to offset any cash savings in the market.

That is total B.S.

Keynes knew that total government spending would fall to a lower level after the end of the war.

US government spending hit just over 50% of GDP towards the end of the war. You are laughbly stupid: Keynes NEVER thought government sending would stay at the level after the war: he knew it would fall in absolute terms and as a percentage of GDP after the end of the war.

(1) everyone knew well that the end of the war would see a big declint in government spending and transition from a wartime to a peacetimr economy: that was a necessary transition and in the US was the so-called downturn of 1945 hwre GDP fell by 12.5%:

Red herring. You are again conflating a decline in war spending with a decline in government spending as such that would offset cash hoarding.

Feb–Oct 1945 The decline in government spending at the end of World War II led to an enormous drop in gross domestic product making this technically a recession. This was the result of demobilization and the shift from a wartime to peacetime economy. The post-war years were unusual in a number of ways (unemployment was never high) and this era may be considered a "sui generis end-of-the-war recession".

So when in doubt, merely DEFINE a decline in government spending as "recession."

HAHAHAHAHAHAHA

Keynes knew such a slump would happen, but he rejected the idea that there would be any return to 1930s depression or stagnation because economy would now be driven by increased consumer spending and American drawing down savings for consumption.

HAHAHAHAHAHA

Now Keynes foresaw a slump post war? Before you said he foresaw no slump.

You're a fucking sophist.

Keynes foresaw no post war slump only because he anticipated social security spending offsetting the fall in war spending.

If he was told in 1943 what kind of government spending would actually transpire, namely, a fall in government spending that would NOT offset cash hoarding, he would have said slump. But there was no slump. There was a huge economic recovery.

I just wanted to point out one more example of prize idiocy from you. You said this.

"So ALL cycles are the result of ABCT??"

You retard! You moron! You idiot! No (business) cycle is a 'result' of ABCT. ABCT is a theory that EXPLAINS business cycles. It explains that ALL business cycles are a result of manipulation of interest rates through credit expansion and monetary inflation.

To even make the statement you made requires a person to be a retard of the lowest possible intellect.

I'm new to this blog but I've read enough to notice the following pattern:

1) The author of this blog opens with a provocative statement

2) Critics will point out a short-coming or omitted fact from that provocative statement

3) The author rarely, if ever, bothers to respond to the initial criticism. Instead, he waits for his attack dogs to jump on the critic with their angry, condescending and often hostile comments.

4) The initial critics spend their time countering angry sound-bites from the peanut gallery and the author of the blog avoids having to answer the critics points.

If this blogger wants to be taken seriously he should stop hiding behind the loudmouth bobble-heads who post here and start answering criticism himself. Otherwise, this blog is not really a forum for ideas as much as a wall for him to spray graffiti on.

To clarify since Major_Freedom doesn't understand, Keynes thought Americans would spend more and save less due to Social Security guarantees of income after retirement. That isn't the same thing as large social spending on the magnitude of the war economy.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).